Public Debt-to-GDP trend and fiscal consolidation

Public debt is one of the main indicators of a country’s fiscal sustainability. In this analysis, we will examine the trends of Albania’s public debt in relation to GDP during the period 2014–2024, assessing the impact of budget deficit, revenue growth, and external economic factors.

During these years, the government has implemented various fiscal policies and has had a changing approach towards public debt, reflecting the economic situation, financing needs, and international pressures on fiscal sustainability.

The table below summarizes the key data on the stock of public debt and its ratio to GDP. It reflects the changes in Albania’s total debt, considering both domestic and external debt, as well as the impact of economic growth on the reduction or increase of this ratio.

In the period 2014–2019, Albania faced challenges in managing public debt but managed to gradually reduce the debt-to-GDP ratio from 70.03% to 64.95%. This was achieved thanks to a combination of fiscal policies that limited debt growth and a moderate economic expansion. However, the pandemic crisis in 2020 severely impacted public finances, causing an economic contraction of -3.3% and a debt increase of over 10%. As a result, the debt-to-GDP ratio rose significantly to 73.92% at the end of 2020.

In the post-pandemic years, economic recovery has significantly contributed to reducing the debt-to-GDP ratio. In 2021, the Albanian economy grew by 12.7%, while public debt increased at the same level, keeping the debt-to-GDP ratio above 74%. In 2022, the improvement in fiscal revenues and strong economic growth of 15.1% led to a significant reduction of the debt-to-GDP ratio to 64.12%. This positive trend continued in 2023 and is projected to continue in 2024, with the debt ratio expected to fall to 54.73%.

However, to maintain this positive trend, it is necessary to ensure sustainable economic growth above 4% per year, while debt management must be more cautious to avoid dependence on expensive borrowing. In addition, maintaining the budget deficit below 2.5% of GDP would help further reduce debt without negatively impacting economic development.

Has the economy grown faster than debt?

Based on updated data for GDP growth:

• In 2021, GDP grew by 8.97%, while public debt increased by 12.9%. In this year, debt grew faster than the economy, keeping the debt-to-GDP ratio at high levels (74.07%).
• In 2022, GDP grew by 4.84%, while public debt fell by -0.3%, leading to a reduction in the debt-to-GDP ratio from 74.07% to 64.12%. This shows that the economy grew faster than debt, which helped in fiscal consolidation.
• In 2023, GDP grew by 3.97%, while public debt declined by -1.1%, lowering the debt-to-GDP ratio to 57.50%.
• In 2024 (estimated), GDP is expected to grow by 3.8%, while public debt will have minimal growth, further reducing the debt-to-GDP ratio to 54.73%.

As seen in the most recent period from 2021 to 2024, the economy has grown faster than public debt, except for 2021, when debt increased at a higher rate due to the effects of the pandemic and the need for additional financing. From 2022 onward, economic growth has outpaced debt, allowing for a reduction in the debt-to-GDP ratio.

However, it should be noted that GDP growth has been slowing, from 8.97% in 2021 to 3.8% in 2024. This shows that even though debt has decreased, if the economy does not maintain higher growth rates, further debt reduction could become more difficult. For this reason, fiscal policies should be cautious not to negatively impact investments and consumption, which are key factors for economic growth.

Is Albania on the path of fiscal consolidation and using debt for economic development?

In recent years, Albania has shown a tendency to reduce the debt-to-GDP ratio, but deeper analysis shows that this process is not sustainable and does not necessarily result from effective fiscal policies. Despite a gradual decrease in public debt after 2020, it is important to understand whether this trend is sustainable or merely a statistical effect of nominal GDP growth.

Why has this downward trend occurred?

First is the nominal growth of GDP. Part of the decline in the debt-to-GDP ratio may be more statistical than effective, as GDP has mainly increased due to inflation rather than real economic growth.

Second, by 2025 the government has undertaken less new borrowing in foreign markets. After the COVID-19 pandemic crisis and the 2019 earthquake, the government reduced the pace of borrowing, helping to curb debt growth.

Third is the increase in fiscal revenues. Revenue collection from VAT and other taxes has brought more income into the budget, reducing the need for new debt. For 2025, state budget revenues are projected to reach 754.6 billion ALL, an increase of 40.6 billion ALL compared to the revised plan for 2024, also due to improved fiscal administration and the narrowing of informality, although at rather low rates.

Following a significant increase in public debt in 2020 due to the pandemic and reconstruction, Albania has followed a declining trend of this ratio, mainly influenced by factors such as the budget deficit and growth in budget revenues.

Fourth is the impact of the budget deficit on Public Debt. In 2020, the budget deficit reached a record level of 110 billion ALL (around 890 million euros), due to revenue decline and increased expenditures resulting from the pandemic and post-earthquake reconstruction.

In 2023, there is a reduction of the Budget Deficit, which was cut to 31 billion ALL, the lowest level since 2018. This came as a result of unexecuted planned expenditures and better fiscal management.

These data show that, after a significant increase in public debt in 2020, Albania has managed to gradually reduce this ratio, mainly thanks to increased budget revenues and deficit containment. However, it is unclear whether this reduction will be sustainable in the long run or is simply an effect of nominal GDP growth.

The example of Ireland: Can Albania follow this model?

A successful example of public debt reduction is the case of Ireland after the global financial crisis of 2008.

In the years 2008–2013, Ireland experienced a rise in Public Debt. The financial crisis and the collapse of the banking sector pushed public debt to over 120% of GDP.

The measures and approaches implemented for debt reduction consisted of:

• Fiscal consolidation, including strict fiscal measures such as cuts in public spending and tax increases.
• Structural reforms, with improvements in the labor market and financial sector to boost competitiveness and economic growth.
• International support, benefiting from financial aid from the EU and IMF to cope with the crisis.

The results or fulfilled expectations were the fact that public debt fell to 58% of GDP in 2019 thanks to sustainable economic growth and careful fiscal management.

Lessons Learned for Albania Apply Just the Same as Above

The importance of fiscal consolidation is tied to the necessity of implementing strict measures, not only in terms of reducing expenditures, but also in tackling informality, both of which can help stabilize public finances in the long term.

Structural reforms have remained halfway or are fragmented and ineffective. Improving the efficiency of the labor market and the financial sector can stimulate economic growth and increase budget revenues.

The international support that has been provided has been underutilized and has lacked the proper impact on the economy and the market. Participation in regional projects and cooperation with international organizations can provide financial and technical resources for sustainable economic development.

Albania appears to be on the path of fiscal consolidation, but this process remains unstable. If the government does not genuinely reduce debt, but only benefits from nominal GDP growth, this trend may prove to be temporary. To ensure a sustainable reduction of debt, Albania must implement deeper fiscal reforms and focus on increasing economic productivity instead of relying on inflation and high taxes.